India and China combined to contribute 63 percent of the total gold jewelry demand in the world in the first quarter.

Investment demand has grown (in China) by an average 14 percent a year since deregulation of the market in 2001, “a trend that has continued with the strong growth momentum witnessed in the first quarter,” it said. China’s investment demand jumped 123 percent to 90.9 tons in the first three months, compared with an 8 percent rise to 85.6 tons for India.

The country’s total (investment + jewelry) gold demand in the first quarter jumped 47 percent from a year ago to 233.8 tons, the council said. That still lags behind Indian consumption of 291.8 tons, according to the council. (emphasised text in brackets supplied.)

low base which means that the investment demand and demand for an inflation hedge from 1.3 billion increasingly wealthy Chinese people is more than sustainable.

The not realized important fact that the people of China were banned from owning gold bullion from 1950 to 2003, means that the per capita consumption of over 1.3 billion people is rising from a tiny base. Gold ownership by the Chinese public remains minuscule. Especially when compared to other Asian countries such as Vietnam and India.

Should the Chinese economy crash as some predict, demand could fall. However, sharp declines in Chinese equity and property markets and a depreciation of the yuan would likely lead to significant safe haven demand for gold. Chinese demand alone likely puts a floor under the gold market at $1,450/oz.

It is worth noting that the People’s Bank of China’s gold reserves are very small when compared to those of the U.S. and indebted European nations. China appears to be quietly accumulating gold bullion reserves. As was the case previously, they will not announce their gold purchases in order to ensure they accumulate sizeable reserves at more competitive prices.

China – Biggest gold producer and consumer

South Africa, which was producing as much as 1,000 tons of gold in 1970, (but) has seen its mining production decline for five straight years.

Accelerating a drop in output last year, the country’s mining authorities started a crackdown on unsafe mines after 3,200 workers were trapped at Harmony Gold Mining Ltd.’s Eldestrand mine in October.

Following an order by President Thabo Mbeki, the mining commission in the last three months started to requiring gold mines that suffer a fatal accident to suspend operations while a safety audit takes place. (emphasised text in brackets supplied.)

340.88 tonnes of gold in 2010, retaining the position of the world’s largest producer of the precious metal, the China Gold Association said. The number of domestic gold producers shrank to around 700 at the end of 2010, from 1,200 in 2002, through mergers and acquisitions

Citic Group, China’s biggest state- owned investment company, and partners agreed to buy Gold One International Ltd. (GDO) for about A$444 million ($469 million), gaining gold assets in South Africa. China Development Bank Corp. and Long March Capital Group are the other members of the bidding group, which is seeking as much as a 75 percent stake and plans to keep the company trading in Australia and South Africa, with a potential listing in Hong Kong. Citic is bidding through its Baiyin Non-Ferrous Group Co. unit and China Development Bank through its China-Africa Development Fund.

Gold One operates the Modder East mine in South Africa and also has projects in Mozambique and Namibia.

China and silver

The other big story is silver. Why this sudden spurt in prices? How sustainable is price increase in silver?

Silver is down nearly 30% this month in volatile trading. Such a move in the Dow Jones Industrial Average would equate to an eye-popping drop of more than 3,700 points. Tony Crescenzi of Pacific Investment Management Co. called silver’s parabolic rise and subsequent skid a “tulip mania-style move.”

Silver backers counter that even with its recent drop, the lesser precious metal has retained a nearly 80% gain over the past year.

While gold supply is well understood, silver bulls and bears argue about just how much silver is out there. Some analysts make the case that silver in batteries and photographic film is “recycled” back into the market, reducing scarcity. Silver bulls, of course, think that’s a bunch of poppycock.

More important, the gold-silver price ratio has gotten out of whack. During most of the past 10 years, the ratio hovered around 60, meaning gold was 60 times more expensive than silver. Silver’s incredible surge over the past year has pushed the ratio down to 43, a level not seen since silver’s last crazed phase in the early 1980s. At its peak, back on April 29, the ratio narrowed to 31, a level not seen in three decades.

Silver bulls will argue that the gold-silver price ratio should reflect the 15.5 level authorized by France in 1803, or the 15 level outlined in the U.S. Coinage Act of 1792. It’s more likely that the ratio will revert to modern-era norms rather than race back to the Napoleonic era. And that means that gold, more than silver, looks like the solid store of value today.

Behind this huge spike in silver prices

The Chinese.

As 2ndlook has pointed out earlier, Chinese love silver – and Indians love gold. Most of Chinese consumption of gold is by a few well-heeled elites with guanxi.

Chinese speculators have emerged as a big driver of silver’s spectacular rally and subsequent crash with trading in the metal in Shanghai soaring nearly 30-fold since the start of the year.

The commodity, nicknamed “the devil’s metal” for its wild price swings, surged 175 per cent from August to a peak of almost $50 a troy ounce two weeks ago. Since then, it has plummeted 35 per cent, hitting a low of $32.33 on Thursday.

At the same time, silver turnover on the Shanghai Gold Exchange, China’s main precious metals trading hub spiked, rising 2,837 per cent from the start of this year to a peak of 70m ounces on April 26, according to exchange data.

The number of contracts outstanding, an indicator of investor exposure, doubled over the same period.

Silver trading in Shanghai remains below the levels in London and New York, the two main global hubs, but its rapid growth means its has become increasingly significant in driving prices. “I’m pretty certain it’s the Chinese retail [investment] that is driving this move,” one senior precious metals banker said. “There’s an enormous amount of speculation going on out there, they’ve got the bit between their teeth.”

The Chinese gorilla

Looking at the reports of the market and commodities, it is plain that the Chinese Government is an interested player in gold acquisition – something that 2ndlook projected nearly 4 years ago. And the Chinese consumer is behind the rise in silver prices.

Since China is anyway the world’s largest producer of gold, disruption in gold supplies has not highly marked. If other Governments follow the Chinese example, gold prices could explode. If Chinese buying gets very aggressive, again, prices could spike.

For Europe, the grand prix is to replace the dollar as the currency of international trade – especially oil trade. Euro as a international trade-currency-of-choice, will give the Euro region access to more than 1 trillion euros in zero-cost floating balances.

China is expecting the yuan to play a similar role. Such are plans made by mice and men.

Sales of gold coins are on track for the best month in a year amid the worst commodities rout since 2008, a sign that bullion’s longest bull market in nine decades has further to run, if history is a guide.

The U.S. Mint sold 85,000 ounces of American Eagle coins since May 1 as the Standard & Poor’s GSCI Index of 24 raw materials fell 9.9 percent. The last time sales reached that level, bullion rose 21 percent in the next year. Gold will advance 17 percent to a record $1,750 an ounce by Dec. 31 and keep gaining in 2012, the median estimate in a Bloomberg survey of 31 analysts, traders and investors shows.

You take free advice …?

Back in late January, as the world’s important people rubbed elbows in Davos, billionaire investor George Soros had some rather definitive thoughts to offer on gold, which he called “the ultimate asset bubble,” according to reports.

In this game of musical chairs, when the music stops, everyone who does not own gold is out. (Cartoon by David Horsey; Courtesy - http://politicalhumor.about.com). Click for larger image.

The new filings from funds “may show that big names exited ETPs and this news may cause prices to slip in the very short term,” said Bayram Dincer, an analyst at LGT Capital Management in Pfaeffikon, Switzerland. Some funds switched to holding gold directly so they wouldn’t have to announce it publicly, he said.

Is gold a bubble?

Gold is in a bubble. Anyone will tell you that. They’ve been saying it since gold was about, oh, $500 an ounce. But it’s a funny kind of a bubble. It’s the only one I’ve encountered where so few people seem to own the asset in question.

During the dot-com bubble, you met lots of people with tech stocks. Taxi drivers told you what dot-coms they owned. During the housing bubble you met normal, ordinary people who were trading up to expensive homes using adjustable-rate mortgages, buying new condos off plan to flip, and cashing out their fictional “equity” through a refinance mortgage.

But who actually owns gold? I keep hearing about the gold bubble, but every time I ask people if they own any themselves, they say, “no, no, of course not, it’s a bubble.”

Some bubble.

Central banks around the world are printing more dollars, euros, pounds and yen. Gold may simply be a less awful currency than all the others. Banks can’t print any more of it, so its price should probably rise while other currencies fall.

For this year, the question in India seems to be, “Will gold cross Rs.25000, by 2011 Diwali?”

Is Pax Americana like Britain was a hundred years ago? (Cartoon courtesy - mpg50.com.). Click for larger image.

Fat and lazy

Between 1875-1935, Britain was dependent on India for gunpowder, on USA and Iran for oil, on Malaya and India for rubber. British economy had grown fat and uncompetitive – unlike Italian, German and Japanese economies.

Even though Britain won WWII, their economy was a lost cause. Though Germany, Italy and Japan were losers, with their economy in shambles, they could make a brilliant recovery and vastly out-compete Britain.

The story of Middle East oil is similar for USA and West. The Welfare State, built on a diet of cheap oil, easy dollars, is now too expensive for the West to sustain. The above book extract gives an excellent snapshot of the oil industry in the 20th century.

With India’s recovery from economic devastation of colonialism now irreversible, many are standing up to claim credit.

A mercenary mass-media and a 'captive' intelligentsia distort the picture! (Cartoon by Jeff Stahler).

End of WWII

Try imagining the Bretton Woods conference. Of the less than 50 countries, three stand out.

Britain – with an empire on which the sun never set. At the end of WW2, Britain was a superpower, its huge colonial Empire intact – apart from the massive debt that it owed the US. With Germany defeated and Hitler dead, Italy in shambles and Mussolini hanged, Japan nuked into submission, Britain sat at the head of ‘high tables’ in the post-WW2 world deciding the fate of the nations – with its partner in crime, the US of A.

The wreckage that was India

India on the other hand, was an abandoned wreckage, impoverished by 100 years of colonialism, millions killed by an indifferent British Raj during the Partition of India (giving rise to a Pakistan), The Great Bengal Famine.

Poverty, hunger, disease, with social distortion and destruction on an unprecedented scale in world history stalked the land.

Regardless of accountability, contribution or acceptance, Muslims secessionists were“much too conscious of their erstwhile political, intellectual, and cultural superiority to be able to accept their new position.” Muslim leadership saw themselves as in a position to demand an “equal share of the power which would befit and be commensurate with their status as the erstwhile rulers of India.”

Cut to the 21st century

‘Great’ Britain is close to bankrupt Britain – with a gross national debt (public, private, corporate debt) equal to 500% of GDP. The decline of US is palpable – though the imagined demise is at least a few decades away. Pakistan’s implosion is happening in real-time and apparent. India has come out in the last 60 years – stronger and greater.

For every Indian success there are many, in India and abroad, who give and take credit. No one, but no one, wants to compare the Indian politician to his global peers who have presided over the fate of ‘superior’ nations. The following report by an ‘interested’ party is no secret – but a matter of prejudice and intellectual baggage that needs to examined.

Lazy minds, mercenary media (Cartoon by Don Addis.).

Seriously

India Habitat Centre has rarely witnessed such a gathering … line of cars waiting to gain entry snaked around the road and outside the Stein Auditorium, the queue of Delhi’s intelligentsia was long and winding … never before had such a huge crowd spontaneously turned up – The occasion was the Penguin Annual lecture – the speaker, Ram Guha … I looked around me and was amused to see that I appeared to be the only politician present. [for a] lecture [that]was intensely political namely “India’s political tradition — those who made it and those who did not” – also the platform to launch Guha’s new book, Makers of Modern India, an anthology of writings of those who have been, according to Guha, the primary “makers of modern India”.

[As it progressed]… an eminent writer in the audience loudly commented that the leaders of today referred to by Guha had not only failed to read these seminal works, but if they read them, could probably not understand them … this admittedly eminent writer … was entirely serious. His cynical dismissal of the entire political class shocked me to the core. What was worse, the entire audience sniggered at the remark … can [anyone] be considered to have an open mind — be it a good writer or sociologist — if he simply dismisses the entire political class with one demeaning remark.

In a democracy are only politicians corrupt? What about bureaucrats, judges, teachers, lawyers, policemen, doctors, nurses, bus conductors? Are not even some journalists and media houses and writers corrupt? What, therefore, gave this eminent writer the right to snigger crudely at senior political leaders? How did he think politicians get elected? By being stupid? In fact, electoral politics is the most intellectually and physically challenging of occupations, as any elected MP will tell you. Besides, you live in a fish bowl, get kicked out every five years and have to seek re-election … (read more via The leaders’ legacy | Deccan Chronicle | 2010-11-08; parts excized for brevity; text within […] supplied for clarity).

Behind Indian Success

Is this forward march of India an accident ? Or a happy co-incidence? Black magic, perhaps? Not forgetting credit to The West? After all, the the West is confident that modern Indian success is due to Western contribution? Of course, it begs a question as to why this has not happened in any other country.

Or why the West could not arrest its own decline?

Is the secret of India's success like the Indian rope trick?

The Wonderous NRI

We must not forget the NRI contribution – especially the Westernized NRIs (like Lord Meghnad Desai who wants to be an Indian now). Possibly, the only people who should not get any credit is are the desi, home grown Indians – and Indian politicians.

Siamese’ triplets

The Great Recession is like a case of conjoined triplets.

One is the USA – who has used their Bretton Woods licence to print dollars and flood the world market with excess liquidity. The US has also used their ‘dollar power’ to gain loyalty by favouring their allies, satellites and client states with low exchange rates that boost exports. Europe, Japan, Asian Tigers, (and now) China have all been favored with a ‘beneficial’ exchange rate in the past. At an ‘appropriate’ time, this ‘benefit’ was taken away. The US gained by ‘recruiting’ low-cost labour of these economies.

The US 'out-thunk' the Euro-zone on the Euro-currency strategy!

US imports, were underwritten by an increasing volume of IOUs, denominated in depreciating dollars. By paying for imports with IOU notes, the US could subsidize their high-cost exports, to these ‘semi-captive’ markets.

With dollar IOUs and dollar liquidity, US funded hi-tech R&D, overseas acquisitions (of companies, raw materials, allies), commercialize new technologies and standards (internet, software) space and defense, et al. Last forty-year estimates, show that US obtained funding equal to one full year’s US GDP. At nil cost!

All this due to the US dollar’s reserve currency status!

Can Europe be far behind

The Euro unwinds!

Post-Plaza Accord, Europe decided to get into ‘reserve-currency’ game, with the launch of the Euro currency in Jan 2002. As an incentive to TT-Note holders, the ECB ‘allowed’ the Euro to appreciate – vis-à-vis the dollar. This gave windfall gains to countries holding Euro as a reserve currency.

From dollar parity in 2002, the EU appreciated by more than 60%. After the introduction of Euro, in the first six years, Euro-bond holders hit a gusher. Anyone who held Euro bonds from January 2002 upto Decemeber 2007, would have made some 80% return during this six years. A return of 15% per annum. Close to junk bond returns.

After the ECB took the bait, the US played a waiting game. After running with the overvaluation bait, for 8 years, the Euro- fish is now tired. It is not able to break free of the over-valuation hook. The US is now reeling in the fish.

With a ‘strong’ currency, the option for Euro-zone is massive and painful deflation. Wages, pensions, prices, welfare state benefits will need to come down – and drastically. Do they have the steel or the hunger to do this. Used to a gold-plated Welfare State, Euro-zone does not have the moral resolve to go on a cold turkey diet of frugality.

There are two types of European state visitors in the United States capital. One seeks to underscore his or her closeness to Washington. The other likes to emphasize how independent Europe really is. But French President Nicolas Sarkozy, who is visiting American Senators and US President Barack Obama, would like to be both at the same time.

Sarkozy also wants to remind the Americans that, as a European, he can defy them. In a speech given in New York on Monday, the Frenchman repeated his demand for better regulation of the global economy. “We can no longer accept a capitalist system without rules or order,” Sarkozy said. “The world economic regulations cannot go on as they are,” Sarkozy said. “A system in which the most money is earned through speculating instead of producing, I don’t want to live in such a system.”

Of course, Sarkozy needs to score points back at home, too. Only last weekend, he was punished in regional elections in France. In an interview, Sarkozy’s own father advised his son not to run for re-election. Given his electoral setback, it makes sense for Sarkozy to bang the drum for French and European interests in Washington. Obama, on the other hand, is feeling reinvigorated following the passage of his healthcare reform through Congress and the new arms treaty with Moscow.

When the US president traveled to Paris last year, he preferred to dine with his wife Michelle rather than Sarkozy. “The hoped-for partnership never materialized,” the French daily Le Figaro wrote. Sarkozy hasn’t forgiven his American colleague for it, either. He has complained to those close to him that Obama is ill-prepared to govern, noting that he didn’t even hold a cabinet-level position before taking office.

The Americans are disappointed that, even after the ratification of the Lisbon Treaty — which was meant to give the European Union’s common foreign policy more clout — the individual European countries are continuing to pursue their own interests abroad. The question, former senior US diplomat and current Harvard professor Nicholas Burns argued in an interview with the New York Times, is whether Europe can “develop a collective European idea of global power? They talk about it a lot, but they don’t do it.” The Washington Post has even criticized Obama for this, noting that in contrast to his predecessors, he hasn’t established close ties to a single European leader.

John Podesta, the leader of Obama’s transition team that helped prepare the newly elected president for the White House in 2009, told SPIEGEL: “His style is certainly different from George W. Bush who wanted to be liked and really developed deep personal relationships.””But if you have the wrong foreign policy and good personal relations, you end up with bad results,” he added. “And if you have the right foreign policy, a strong team to implement it, and thinner personal relations, you’re more likely to have very good results.”(via L’Americain in Washington: Sarkozy Searches for Friendship with Obama that Has Eluded Him – SPIEGEL ONLINE – News – International).

Between Europe and racism

Even US media cannot ignore Obama's race! (NYPOST cartoon).

While 2ndlook was analyzing the new calculus between USA and Europe, a worried European press (for instance, Der Spiegel) was looking at Franco-American relations through a German prism.

Franco-American relations – a perspective

In the 1960s, the USA was bleeding gold. Most of the world was buying gold at an artificially low price US$35 – under the Bretton Woods Agreement. USA was printing dollars and dumping it in world markets. Calls for devaluation of the dollar price was resisted by the US, as that“would reward the speculators and be a special windfall for two gold producing countries that have few friends in the Congress, namely Russia (which usually sells at least $400 of gold a year) and South Africa (which sells about $1 billion).”

The French, unhappy with a“monetary system of gold, dollars and pounds” redeemed their dollar holdings (1958 onwards), sent the French navy (in 1965) to take delivery of gold from USA and bring it to Banque de France. The French raised gold reserves and dumped dollars. Time magazine called this“an open assault on the monetary power of a friendly nation” – dutifully, echoing American Government’s feeling. Banque De France finally, by 1968, increased its gold reserve to 92% (as a percentage of total foreign currency /monetary reserves). This was much like the pre-WW2 French methodology devaluation, new peg, of old debt for new gold routine got the US hackles up.

Many decades have passed since these redemptions by France. The new French President, Sarkozy believes it is now possible to renew US-French relations.

If wishes were horses!

USA-Europe-Asia

It was at Copenhagen, that for the first time, Europe realized that they no longer have the inside track with the USA. At least, in Obama’s administration. The ‘special relationship’ that swells the British chest, has been under some strain. For some time now. The US engagement with Asia makes some sense – as it is Asia, which has extended some US$3-4 trillion in credit, growth opportunities to the US. Europe increasingly seems more like a liability – and a truculent competitor.

With Government debt level ranging between 2%-20%, Russia is in a league of its own. No other major government in the world has such low-levels of debt.

Dependance on raw materials can be the first step!

Russia is selling dollar bonds for the first time since the government defaulted on $40 billion of domestic debt in 1998. The five-year notes yield 125 basis points over similar-maturity U.S. Treasuries and the 10-year bonds have a 135 basis-point spread.

The sale is the second-biggest public dollar debt offering in emerging markets on record, after Qatar sold $7 billion of five-year, 10-year and 30-year bonds in November, Bloomberg data show.

The yield on Russia’s 11 percent dollar note due July 2018 has dropped 77 basis points to 4.489 percent this year, according to prices by Renaissance Capital. The nation’s debt is rated BBB by Standard & Poor’s, two levels above non-investment grade, and one step higher at Baa1 by Moody’s Investors Service. (via Russia, Egypt Return to Bond Markets for $7 Billion Update3 – BusinessWeek).

At the start of the Great Recession, the Russian industrial and corporate systems were on the verge of bankruptcy. Russian industry with hugely in debts to Western banks, payable in the next 12 months, were in difficulties, refinancing these debts. Defending the Russian rouble, riding the treacherous waves of the The Great Recession, Russian foreign exchange reserves went down from nearly US$400 billion to US$275 billion.

Squeezing Russia

Russian crisis and default are ‘artificial’ and opportunistic creations of Western bankers, trying to squeeze a recalcitrant country. Russia managed the“budget deficit to hit 6.8% of GDP this year and wants to lower that to around 3% by 2012.” G7 and OECD countries have created a club for themselves, by giving each other unlimited line of credit – while the developing world gets credit based on fast-depreciating dollar/euro foreign exchange reserves.

Maybe this needs an inversion.

As demand and prices crashed … so did Russian economy!

Russia’s Achilles’ heel

Russia is too dependent on high raw material prices. High prices result from hot demand from the world economy. Russia feeds on high growth rates – but cannot be the reason for growth of the global economy.

Large swathes of Russian enterprise have reverted back to the state – albeit in a corporate form, in the hands of oligarchs, a proxy for the State . The world has not yet forgotten the Russian debt default. Russia has come out from a default about a decade ago – with a nearly US$400 billion reserves – flexing its muscles in Georgia and dependent on a high oil prices.

Russia should get off its high military horse. Instead Putin-Medvedev should build alliances, sign agreements within the BRICS framework and rebuild the Russian system.

Heads you lose, tails I win

Russia’s mineral resources map – (Courtesy – Der Spiegel)

Like Quicktake has pointed out in earlier posts, the US has alternated between an overvalued currency to gain ownership over large sections of world economy – and now with a devalued dollar, it seeks to gain an upper hand in merchandise exports. The three main points that one needs to understand are: –

What the US is now proposing is that the Chinese Yuan must become ‘stronger’ – and the dollar must become weaker. This will mean a real reduction in US debt – and a subsidy for US exports. Of course, a devaluation has never helped any regime in the long run – but in the short run it reduces imports and increases exports. But is a ‘fix’ that the patient begins to become dependent on!

Intrigued? Interested!

The 2ndlook blogs group try to give its readers a 360° view of the past present and probable outcomes. These four blogs have each a different focus. The common value that runs through these blogs is an invite to readers for discussion and participation - with a proviso of no personal attacks or use of invective.

With a focus on history, long-term trends, economy, political and social models. A blog that works to breakdown propaganda for what it is. The first blog of the group, over the four years of its existence, it has managed a monthly traffic of more than 10,000 hits.

Quicktake focusses more on current events, recent events, reports, media buzz, matters of topical interests. Typically, Quicktakes are shorter than 2ndlook. Sometimes a few Quicktakes, morph into a 2ndlook post.

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